Every single crypto investor became aware of NFTs in 2021. What is an NFT? And why is this technology so hot right now? This article is a beginner’s guide to NFTs. We’ll guide you through the history of NFTs and show examples of how this technology is implemented. You’ll also find out why NFTs can be so valuable!
Table of Contents
Fungibility explained
The abbreviation NFT comes from the words Non-Fungible Token. The word fungible might not be familiar to many people. Especially for those, who don’t have English as their mother tongue. Fungible and fungibility are rarely used in daily discussions.
The synonym for fungible is interchangeable. When something is non-fungible, it’s unique. Let’s dive into history to understand why fungibility is so important for money and cryptocurrencies.
Gold and silver were used as mediums of exchange in Egypt 5000 years ago. They were not money, though. This was because each piece of metal was in different sizes and weights containing various amounts of gold or silver.
The solution was the introduction of coins. This revolutionized trade, commerce, and the development of mankind about 2500 years ago. When gold and silver were minted into coins of equal size and weight, fungibility was born. Check the video below if you want to learn more about monetary history.
Fungibility is an essential attribute of money. Not just for coins, but also for bills and digital currencies. Fungibility enables money to be divided into smaller units, which are all interchangeable.
For example, you can change a 20-euro bill for one 10-euro bill and five 2-euro coins. You could also change a 100-euro bill for five 20-euro bills and still hold an equal amount of value. Fungibility is also present in the digital world with fiat money and cryptocurrencies.
Non-fungible tokens vs other cryptocurrencies
All regular cryptocurrencies are fungible. One bitcoin in your wallet has equal value to one bitcoin in your friend’s wallet. If you owe one bitcoin to your friend, you can also send him five payments of 0.20 BTC each.
The previously described feature is true to a certain extent. Since this article is a guide for newbies, we don’t go deeper into the subject of “dirty bitcoins”. You can search more from Google if you are interested in a deeper dive.
To keep things simple between “fungible” and “non-fungible”, let’s just say all normal cryptocurrencies are always fungible (interchangeable) with each other.
In the beginning, you could only create fungible cryptocurrencies. All standard cryptocurrencies are still mined or created into existence with this feature. The predecessor of NFTs was an idea called colored coins. It was introduced already in 2012. You can read more about the history of NFTs here.
The concept of a non-fungible token didn’t hit the mainstream until late 2017. That is when CryptoKitties online game became hugely popular. It clogged the entire Ethereum network due to increased transaction amounts.
The game still exists, and every crypto kitty is, in fact, an NFT. This is also when the Ethereum ERC721 standard was born. It provides a framework and rule set for creating NFTs. Many readers might know ERC20, which is the standard for normal (fungible) tokens.
A non-fungible token is like a standard token with steroids. It has the same basic features as a fungible token: it is 100% digital, it can be sent to anyone, and it can be stored in a cryptocurrency wallet. Non-fungible tokens can be also traded on exchanges like standard tokens.
One major difference is that a non-fungible token cannot be divided into smaller pieces. You will soon understand why, when we’ll go through NFT use cases.
When we talk about a non-fungible token, it’s critical that one can be sure of its uniqueness. It has to be also verifiable that the number of NFTs is limited. This is why blockchain is so useful. Each token and its supply can be verified at any time.
The next development stage is already here and that’s called the ERC1155 standard. It will make the NFT creation process much faster, simpler, and more efficient. Check this article, if you want to read more about the differences between ERC721 and ERC1155.
NFT use cases
In the next chapters, we’ll show you popular use cases for NFTs. Since 2020, two major categories have emerged: NFT art and NFT games. We’ll start with these.
Digital art: Bored Apes and CryptoPunks
NFT art is easy to understand as a concept. It is about digital artwork, which means images and videos. When buying an NFT you are buying a digital artwork, just as you would buy a painting in the real world. In the art category, two collections stand out above the rest: Cryptopunks and the Bored Ape Yacht Club. Both have been traded for over $2 billion.
The picture below shows a few NFTs from the Bored Apes collection on the popular OpenSea marketplace.
The monkey art in the picture is priced at 83 to 87 ETH, which at the time of writing is around $108,000 to $113,000. At its highest, one Bored Ape NFT has been priced at $3.4 million. Several Ape NFTs have been sold for over $1 million each.
CryptoPunks is one of the oldest NFT collections. It contains facial images created with simple pixel graphics. The most expensive CryptoPunk is worth a staggering $23 million. Many celebrities and social influencers have used both CryptoPunk and Bored Ape NFT as their profile picture on social media.
Both CryptoPunks and Bored Apex collections were created on the Ethereum platform.
NFT games: Axie Infinity and Sorare
Although CryptoPunks and Bored Apes are popular collections, their trading volumes pale in comparison to Axie Infinity. This is a game using NFT technology. Axie Infinity figures have been traded for more than $4 billion, as much as Cryptopunks and Bored Apes put together.
Axie Infinity is a very typical game in which the player acquires an Axie character and battles other players’ Axies with it. The image below is from the Axie Infinity marketplace.
Each Axie character has different features that make some more valuable than others. Just as in NFT art, there are items that are more unique than others. The rarer the features, the more people are willing to pay for such NFTs.
Axie Infinity is implemented differently from the art collections mentioned above. Instead of an Ethereum platform, Axie Infinity has its own sidechain, Ronin. It also made the news in the spring of 2022 in an unfortunate way, as the token bridge between the Ronin blockchain and Ethereum was hacked for more than $600 million.
Another popular NFT game is Sorare. It combines digital trading cards and fantasy football. The idea is to acquire players from football clubs as trading cards (NFT) and then compete against other collectors. Your card will be awarded points based on how well the player performs in real football matches. Each digital card is an NFT you can own or trade for cash.
Sports NFTs: NBA top shot and FIFA
In addition to art and games, NFT technology has also had a strong presence in the world of sports. The NBA Top Shot, built on the Flow blockchain, has sold over a billion dollars worth of digital moments from the NBA. The collector buys the rights to great NBA moments in a video format.
Football’s governing body FIFA also launched its own NFT collection in September 2022. FIFA’s technical partner is Algorand.
NOW LIVE: @FIFAcom makes digital history with the launch of @FIFAPlusCollect powered by #Algorand! Fans around the world will now have the opportunity to affordably own the greatest moments in football 👉 https://t.co/2Pk9NdBGB5 pic.twitter.com/uN5k2hfBeu
— Algorand (@Algorand) September 22, 2022
Like the NBA top shot, FIFA’s World Cup NFT collection contains goals and other great performances from the history of the World Cups. One NFT is one video clip. These can be also traded on FIFA’s own marketplace. NFTs can be transferred to an external Algorand wallet as well.
NFT technology fits perfectly to the world of sport. The technology will also enable the creation of dynamic NFTs. The appearance and data of a dynamic NFT can change based on how a player performs in, for example, a World Cup final. Dynamic NFT is abbreviated as dNFT.
NFTs and metaverses
The term metaverse has emerged in recent years in the context of NFT technology. The two topics are very closely related. If you are not already familiar with metaverse, check out our extensive beginner’s guide.
The exact definition of the metaverse is still a bit fuzzy, but it builds primarily on Web 3. A metaverse is often seen as a virtual world where one can interact with other users digitally. The boundary between traditional games and the metaverse can sometimes be challenging to set because of social characteristics.
The idea of a metaverse is digital ownership brought by Web 3, and this is where NFT technology comes in. Decentraland, for example, is a popular metaverse. It is a virtual world where each plot of the digital land is represented as an NFT. You can buy your own slot in this world and build different things there.
Sandbox is another popular game in the metaverse niche. It could be called the Web 3 version of the popular Minecraft game.
Metaverses take NFT technology to a new level. Instead of owning a piece of art or a video, you can own a piece of a virtual world where millions of people interact with each other.
You can also invest in the Sandbox and Decentraland games by buying their own tokens (SAND or MANA), which can be found in Binance.
The Mona Lisa example
The concept of digital art is not a difficult one to understand. However, many still fail to understand how it can be unique or scarce. The common argument is this: one can save any image from the web with a couple of mouse clicks. Since it’s so easy to “steal” or copy the artwork, how could it have any value?
We’ll answer this question by using Mona Lisa as an example. The famous painting is one of the best examples of uniqueness. It’s hanging on the wall of the Louvre, and everyone knows it was painted by Leonardo Da Vinci. The painting is priceless and as unique as anything can be. Everyone also knows where the real Mona Lisa is located.
This is not the case with digital art. As mentioned earlier, it is very easy to download any image from the web to your own computer. You could go to any NFT marketplace and just save each image file and enjoy the art 100% free. So, how can digital art be valuable?
First of all, you can also download Mona Lisa very easily. Just go to Google and download any of the millions of images out there. You can also buy a poster from the Louvre gift shop or take a photo with your own camera. Hang that picture on your wall and enjoy the work of Leonardo Da Vinci 100% free.
You could also hire an artist to make a copy. He could use a similar canvas and frame as Da Vinci did. As long as there has been art, there have been forgeries. Many of them are done so well that even professionals can’t tell a difference.
There is one important point in all this. You know that your Mona Lisa is fake. This means you have no proof of authenticity. If you’d ever want to sell your painting, you couldn’t prove it’s the one and only Mona Lisa. Just because it looks like Mona Lisa, it doesn’t mean people would pay millions of dollars for it.
This is why NFT art is valuable. The blockchain proves you have the original piece. The blockchain shows the history and the current owner of each NFT. You know you got the original one, and so does everyone else.
Both digital and analog art can be copied. Lots of forgeries are being sold in the art industry. There are also fake gold and silver bars with copper inside them. Anything can be counterfeited. What counts is the proof of authenticity and ownership.
If someone wants to enjoy copied digital NFTs or a fake Mona Lisa, there is nothing we can do about that. However, this person would own nothing of value.
The future of NFTs
NFT technology hit the mainstream in 2021. It was impossible to avoid the boom. There are now thousands of companies working on NFT technology. The FIFA example above shows that NFTs will become increasingly visible in the mainstream.
The possibilities of this technology are endless. The game industry is guaranteed to be one of the future beneficiaries of the technology. How would you like the idea of owning all the stuff in your adventure game and being able to bring it into the version of the game as NFTs? Soon, you can sell the diamonds or other items you collect in your mobile game in a cryptocurrency exchange.
In addition, NFTs offer huge opportunities in art and finance. Tokenized shares are a good example of how NFTs can be utilized.
The multi-chain world of NFTs brings interesting challenges from a technical point of view. What if a collection published on the Ethereum platform is also launched on the Solana platform? Or could CryptoPunks move to another blockchain in the future? How will ownership rights work, then?
NFTs are here to stay. The technology is already surprisingly old, but its breakthrough didn’t happen until 2021.
If you want to buy NFTs, check this article: How to buy an NFT at Opensea.